One explanation for China’s rapid economic growth during the past several decades is its expansion of policies that encourage “technology transfer.” By this, we mean policies such as opening up to international trade and attracting multinational corporations through various incentives—that encourage the use and adoption in China of new ideas and new technologies. This question asks you to use the Solow model to study this scenario. Suppose China begins in steady state. To keep the problem simple, let’s assume the sole result of these technology transfer policies is to increase Ā by a large and permanent amount, one time. Answer the following questions:
(a) Analyze this change using a Solow diagram. What happens to the economy over time?
(b) Draw a graph showing what happens to output in China over time. What happens to output per person in China in the long run?
(c) Draw a graph showing what happens to the growth rate of output in China over time. Explain.
(d) Discuss in a couple of sentences what your results imply about the effect of technology transfer on economic growth.